Told you so!
As I said on Tuesday, when we were still making record highs (ah, the good old days!): “If we didn’t hedge, I would certainly be calling for us now to take the money and run but we’re well-hedged for a 20% drop in our Short-Term Portfolio (STP).” Fortunately, we INCREASED our hedges in the STP – as we certainly expected a pullback – we just thought we’d have more than 24 hours before it started…
When you have a market that runs up on low volume, it’s like a Jenga tower and you know that, eventually, SOMETHING will knock it down – you just don’t know exactly what it will be or exactly when it will happen – but it WILL happen. Yesterday, the Fed pulled the wrong peg and the market had a meltdown and, while that was happening, Elon Musk (who’s in charge now) pulled another peg by scuttling the bi-partisan agreement to fund the Government and now they have until tomorrow at midnight to rewrite and agree on a new 500-page bill.
While the Fed did lower their benchmark rate 0.25% to 4.375% the Fed’s data and “dot plot” chart indicated just two more 0.25% cuts are expected in 2025 – to 3.875% and that is MUCH higher than the 3.375% or less that has been broadly expected by the market. Not only that but inflation has been heading the wrong way and, as I noted in our Live Trading Webinar, the Fed has no accounting at all for Trump’s tariffs – which are widely expected to boost inflation considerably next year.
That sent the 10-Year Note rates flying up to 4.5% and it’s VERY BAD news if they break over that mark. The CBOE Volatility Index (VIX) spiked 60% into the close and Elon Musk lose about $25Bn as TSLA stock fell 8.1% – so there are repercussions for his actions, at least.
Both Trump and Musk opposed the Government Funding Agreement but it was Musk who openly threatened to back primary challengers of anyone who supported the current bill, which was the result of weeks of bipartisan cooperation. Christmas is cancelled – both for the Congresspeople who are now shutting down the Government and the 100s of thousands of Federal Workers and Contractors who will now get coal in their stockings instead of paychecks next week.
That is, of course, a huge blow to the Q4 economy as well and Trump’s main issue is he wants Congress to raise the Debt Ceiling – so he can blame it on Biden. Yes, really, that pettiness is what this whole thing is about.
Meanwhile, we’ll see how resilient the indexes can be after absorbing yesterday’s shocks. Q3 GDP just came in at a revised 3.1% – up from 2.8% in the last estimate and that’s yet another reason for the Fed to pause but the Philly Fed report is down 16.4 in December from -5.5 – so we still have signs of internal weakness but the Atlanta Fed’s GDP Now indicator still has us over 3.2% for Q4 – 50% higher than Leading Economorons are expecting (2.1%).
The economic crosscurrents make this a particularly challenging environment to navigate. The stronger GDP print would typically be good news but, combined with sticky inflation and the Fed’s hawkish stance, it’s creating the perfect storm for market uncertainty and yesterday was one of those “rogue waves” that are bound to happen sometimes.
This disconnect between various economic indicators, coupled with the political theatre threatening a Government shutdown creates exactly the kind of instability that can turn a normal market correction into something more serious. The fact that we’re seeing this volatility spike right before the Holidays, when trading volumes typically decline, could amplify market moves in either direction.
Our hedged positions have proven their worth once again, protecting us from the full impact of yesterday’s decline. As we head into the final trading sessions of 2024, maintaining these hedges seems prudent, especially with the Government shutdown deadline looming and markets still digesting the Fed’s less accommodative stance.
Remember, it’s not just about protecting against known risks – it’s about being prepared for the unexpected pegs that might be pulled from our market Jenga tower.
Be careful out there!
